IMOS

Business Context and Reporting Period

ChipMOS TECHNOLOGIES INC. (NASDAQ: IMOS), a leading provider of outsourced semiconductor assembly and test (OSAT) services, reported unaudited consolidated financial results for the third quarter ended September 30, 2017. The filing was submitted on November 9, 2017. Financial figures are presented in accordance with Taiwan-IFRS, with U.S. dollar conversions based on an exchange rate of NT$30.33 to US$1.00. Notably, starting in Q1 2017, revenue from the former subsidiary ChipMOS Shanghai is excluded from consolidated revenue following the sale of a 54.98% equity interest, though the company retains a 45.02% share of its net income.

Key Financial Metrics

Cash Flow (Nine Months Ended Sep 30, 2017): Net cash generated from operating activities was US$115.1 million. Net cash used in investing activities was US$74.5 million, and net cash used in financing activities was US$3.9 million.

Material Changes vs. Prior Periods

• Revenue Decline: Q3 2017 revenue decreased 2.4% sequentially from Q2 2017 and 7.1% year-over-year from Q3 2016. The decline is attributed to lower allocations from the largest DRAM customer and product mix changes.
• Margin Compression: Gross margin contracted to 17.2% from 20.1% in the prior quarter. Management cited production disruptions and losses from Taiwan's August power outage as contributing factors.
• Earnings Drop: Net earnings per diluted ADS fell to US$0.13 from US$0.25 in Q2 2017. Net income attributable to equity holders dropped to US$5.3 million from US$10.6 million.
• Debt Position: Net debt increased to US$94.4 million from US$48.9 million in Q2 2017, despite a reduction in short-term bank loans of approximately US$34.0 million. This increase was driven by a cash dividend payment of approximately US$28.2 million and operating cash outflows.
• Segment Utilization: Overall capacity utilization decreased to 76% from 77% in Q2 2017. Testing utilization dropped to 75% (from 82%), while LCD Driver utilization remained stable at 87%.

Guidance, Outlook, and Management Commentary

Management highlighted several strategic shifts and market drivers for the future:

• DDIC Growth: The company expects continued growth in Display Driver IC (DDIC) demand driven by the adoption of 4K2K/UHD TVs and smartphones with narrow bezel/full-screen panels (18:9 aspect ratio). This shift requires longer test times and advanced 12-inch fine pitch COF packages, which should benefit margins.
• Mobile Sensors and NOR Flash: Management anticipates benefits from increased adoption of optical sensors in the mobile market and strong demand for NOR Flash wafer test services, with capacity remaining fully utilized.
• Operational Challenges: The Q3 results were impacted by the Taiwan power outage and lower DRAM allocations. Management is prioritizing capital expenditures to support long-term growth strategies and targeting sustainable higher margin opportunities.
• Non-GAAP Measures: Non-GAAP free cash flow for Q3 2017 was negative US$30.5 million, compared to negative US$11.2 million in Q2 2017, largely due to the dividend payment. Non-GAAP EBITDA was US$37.8 million.

Investor Verification Checklist

• DRAM Customer Concentration: Verify the extent of reliance on the largest DRAM customer and the stability of future allocations given the recent reduction.
• Power Outage Impact: Assess the long-term operational and financial impact of the August 2017 Taiwan power outage on production capacity and customer relationships.
• Dividend Policy vs. Liquidity: Review the sustainability of the dividend policy (US$28.2M paid in Q3) given the increase in net debt and negative free cash flow.
• DDIC Transition: Confirm the timeline and volume ramp-up for 12-inch fine pitch COF packages and the realization of expected margin improvements.
• ChipMOS Shanghai Accounting: Understand the ongoing recognition of 45.02% net income from the divested subsidiary and its impact on future earnings volatility.